The euro traded quietly on the first day of the week amid the holiday-thinned market. On Tuesday, the euro again came under selling pressure. EUR/USD dropped to 1.0300, the lowest level sinceDecember 2002. In this connection, speculations on its parity level with the US dollar resurfaced among traders. There are a few reasons behind the euro's fall.
The major reason was the fact that the EU reported a deficit in its trade balance. On Monday, Germany unveiled the first deficit for more than 30 years in the trade balance in May in monthly terms. Energy imports sharply increased whereas trade with Russia and China was disrupted. A worse trade balance in Germany drags the whole euro block down.
Currency strategists consider downbeat trade results the most plausible explanation for the euro's decline. Indeed, it means a crucially different macroeconomic environment for the euro block. A double proficit turned into a double deficit.
Therefore, the Eurozone driven by the largest economy of Germany becomes a net importer which creates fundamental pressure on the euro. Apparently, Europe's prospects don't look rosy. Experts at Commerzbank reckon that EUR/USD could slump even below the parity level for a variety of reasons, including gas issues. The crisis in petroleum imports is likely to leave its imprint on theEU economy. In turn, EUR/USD will be able to develop a steady rally provided that the gas crisis is settled.
ECB and euro
Lately, the ECB comes up with hawkish remarks, but it is not enough to support the euro. The regulator is acting sluggishly in normalizing its monetary policy Even if the ECB ventured into the first rate hike and raises the key policy rate to positive values, it is still lagging behind other major central banks. They have already made some moves towards tighter monetary policies. In this context, the euro lacks an advantage over other currencies compared to the period until 2013.
The ECB's obvious hawkish stance has been spotted by analysts and priced in. Later this month,the regulator is expected to raise interest rates by 25 basis points. Market participants are anticipating the same rate hike in September. What will happen next? Further policy decisions will depend on how the central banks manage to tame inflation and how CPIs will slow down in the coming months.
Most experts hardly believe in more aggressive tightening by the ECB. By and large, it doesn'tmatter a lot bearing in mind the US dollar's stunning rally.
The US dollar index is trading at the highest level in almost two decades, aiming to settleabove 106.00. The greenback finds support from cautious market sentiment followingthe long weekend in the US. The king dollar has been reigning on Forex for quite a while. Nevertheless, the US dollar cannot extend its rally indefinitely. Sooner or later, the US dollar is set to reach a peak and retrace downward. Nobody has predicted the level when the US dollar index will level off.
Historically, the greenback used to grow amid three fundamental factors: global inflation of more than 5%, a slowdown in the global economic growth, and joint monetary tightening by influential central banks. The last time when these three factors came together was in 1980.
On the back of the ongoing macroeconomic situation in the world's economy, namely, weak economic growth and soaring inflation, the US dollar is set to flex its muscles. A lot of reputable analysts are poised to predict the euro's slump to 1.0200 against the US dollar later this year.
On Tuesday, the British currency was also weighed down by the firm US dollar, though thesterling was not as bruised as the euro. GBP/USD went to around 1.2000. However, the pair is unlikely to break this level at present. Currency strategists at UOB Group rejected this scenario today. They believe the odds are against that GBP/USD will make another test of 1.1970. The currency pair is expected to consolidate between 1.2080 and 1.2170. Notably, the lower border of the expected trading range has been already broken today.
Meanwhile, GBP/USD is following the overall bearish trend. Suggesting their bearish forecastson the sterling, experts at JPMorgan underpin their argument with the fact that inflation in the UK is the highest in G10. Moreover, the UK economic growth would be below the GDP figures of most advanced economies. Domestic jitters are denting the outlook for the pound sterling. The Bank of England will hardly succeed in reducing downward pressure on the British pound.
Among other gloomy prospects for the UK economy is that inflation is unlikely to reach its peak until October. JPMorgan experts reckon that the CPI will approach 11% on year in the autumn. The Bank of England signaled that it is ready to speed up rate hikes and raise the key policy rate by 50 basis points at the nearest meeting. On the other hand, some analysts suggest weighty reasons why the central bank will retain its gradual pace of monetary tightening. In other words, the pound sterling has not a single factor for a gradual recovery. For the time being, the US dollar is extending its stunning rally. So, it is unclear when exactly it will top out.